I’m looking for value stocks and I think the FTSE is the best place to look.
The FTSE 100 and FTSE 250 haven’t performed well for a long time amid a host of issues, the first of which was Brexit. That said, many banking stocks never recovered following the 2008 financial crash.
Brexit and other uncertainties surrounding the UK have made British stocks look less attractive to many investors. As a result, I think the UK is a good place to hunt for value stocks.
A value stock is one trading at levels that are perceived to be below its fundamentals. Characteristics of value stocks include low price-to-earnings (P/E) ratios and higher dividend yields.
So, here are my two top value stocks I’d buy right now.
Lloyds
Lloyds (LSE:LLOY) is one of the most traded stocks on the FTSE 100. The banking giant is heavily weighted towards the housing market. In fact, 71% of its loans are mortgages.
In the short term, analysts don’t really know what’s going to happen to mortgage volumes as interest rates rise in response to inflation. However, in the long run, I anticipate demand for housing to remain strong as successive governments have failed to address the UK’s acute shortage of homes.
Lloyds is actually embarking on an interesting project whereby it intends to buy homes and rent them out. It will purchase as many as 50,000 homes over the next decade according to reports. This could enhance margins, although it will increase the bank’s exposure to the housing market.
It’s also worth remembering that higher interest rates mean higher margins. Lloyds will even get more interest on the money it leaves with the Bank of England.
It currently has a P/E ratio of 5.6 and a dividend yield of 4.8%. Last year the dividend yield was a very healthy 3.75%.
A forecast economic downturn will create some short-term challenges, such as loan defaults, for the business this year. Despite this, I believe Lloyds is one of the best value stocks out there that I could buy today.
Persimmon
UK housebuilding stocks are a good place I could look for value right now. Persimmon (LSE:PSN) is known for its huge dividend yield, currently 13%. But that’s not the main reason I’d buy it (a big yield like that is probably unsustainable).
One reason I like Persimmon is it’s seemingly less exposed to the cladding crisis than other developers. The firm expects to spend £75m on recladding homes in the UK. This is less than 10% of the company’s pre-tax profits in the last reporting year.
Persimmon’s H1 results, published on Thursday, disappointed a little. House deliveries were slightly lower than expected due to planning delays and labour shortages. But profits still came in above expectations on the back of a very strong housing market.
And as mentioned above, I’m confident on the strength of the property market in the long run, so I’m not too worried about any short-term fall in demand. But higher rates will undoubtedly continue to weigh on this stock for a while.
The dividend is huge, but unsustainable in my opinion. Last year, Persimmon had a dividend coverage ratio of 1.06. A healthy dividend ratio would be close to two.